Cours d'economie - Economie internationales - Institutions internationales - The Bretton Woods Institutions
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Britain, then by and large the world most important industrial and economic power, had repealed Corn Laws in 1846, initiating a trend towards liberalising trade exchanges. However this “first” international economic order was drastically affected by the 1st World War and the Great Depression. How to organise the international economy in such a way as tragic events witnessed since 1929 would not occur again was at stake at the Bretton Woods Conference[2]. Representatives strove to create a multilateral economic order that would ensure lasting peace through economic growth and exchanges in accordance with the UN Charter. As a result, BW should have paved the way for the establishment of an international bank in charge of Europe’s reconstruction; of an international monetary fund to secure exchange rates stability and of an international trade organisation. However, only two of them, the World Bank and the IMF were founded in the wake of the Conference. Not until 1994-1995[3] was the World Trade Organisation established. We shall therefore focus on the WB and the IMF.
The term “World Bank” is slightly misleading. The World Bank is not made up of one but five financial institutions.
Historical context leading to the establishment of the WB system: The International Bank for reconstruction and development was created in March 1947. Given that most of Europe (then the US’s main economic partner) lay in ruins, its reconstruction was one of the main priorities of Truman’s administration, as disputes with the USSR were rising. The newly created institution was first assigned to help (European) devastated states gather capital. However, fearing the spread of communism throughout Europe, the Truman administration bypassed international institutions and opted to assist European states directly, through the Marshall plan (5th June 1947).
The World Bank’s structure: The IBRD is headed by a council of Governors representing all the member-states; and a board of 24 directors. The board is traditionally headed by the American representative. States’ influence in the decision-making process depends on their quote-part, which is the share of the Bank’s capital they have subscribed, which vary according to their economic weight. The US currently holds 17,5% of the quote-parts, Japan is next holding 7,9%; followed by Germany (6,1%); France and the UK (5,9% each). The IBRD itself subsequently created two “subsidiary” banks: the International Finance Corporations was established in 1956, whose role consists in holding stakes from companies which it helps create; and the International Development Association, which was established 4 years later. Other institutions are the Multilateral Investment Guarantee Agency and the International Centre for the Settlement of International Disputes. The World Bank group hires 9,300 people.
Evolution in the WB’s role within the international monetary system As a result of the Marshall plan, the World Bank increasingly took responsibility for helping developing countries through the granting of long term loans. It is now financing specific development projects in some of the world’s poorest countries. Since 1980, these countries willing to get some financial assistance to help them implement structural, macroeconomic reforms, are eligible to so-called “structural adjustment loans” provided some criteria are met. Nowadays, the poorest countries are eligible to middle-term loans (18 months-3 years) as well. In 2004, the World Bank granted some 11 billions $ loans.
The International Monetary Fund and the international monetary system:
BW and the IMF: structuring the international financial system; providing conditional assistance to states coming across financial difficulties:
Along with the World Bank, the IMF was established with a view to fostering international financial and monetary cooperation. Representatives at Bretton Woods were aiming at securing stable exchange rates to foster international trade: monetary “wars”[4] were to be prevented through multilateral institutions. Negotiators were presented with two projects. Keynes’ would ensure that states facing lasting trade deficits would be assisted by states enjoying surplus. This solution was not accepted. Instead, that from White, the American representative, was chosen: any state coming up against major trade or fiscal deficits would have to implement restrictive economic policies prior to getting financial assistance from the IMF.
The IMF’s structure: The IMF’s status came into force in June 1946. Its current membership amounts to 184 states and its staff to around 2,700 in 2004. Since its creation, it is headed by a Board of Governors, which consists of one Governor from each of the IMF’s 184 member countries. All Governors meet once each year at the IMF-World Bank Annual Meetings; 24 of the Governors sit on the International Monetary and Finance Committee (IMFC) and meet twice each year. The daily work of the IMF is conducted by its 24-member Executive Board under the guidance of the IMFC. Seven states are permanent members of the Executive Board: the US, Japan, Germany, France, the UK, Russia and Switzerland. The Managing Director usually comes from Europe and is currently Rodrigo de Rato y Figaredo. The Managing Director is Head of IMF staff and Chairman of the Executive Board. Most of the decisions are agreed on through a qualified-majority procedure based on respective quote-parts: the US holds 18, 2% of them (thus retaining a veto power), Japan and Germany 5, 7% and France and the UK 5, 1%.
The international financial system such as envisioned during the BW conference: The IMF has been conceived according to White’s project. Each currency’s value could fluctuate from +/- 1% from that of gold, and thus from that of the dollar, which used to be the only currency convertible to gold following fixed exchange rates. Any member-state facing temporary deficits of its balance of payment could borrow in “strong” currencies (making up SDR[5]) up to 125% of its quote-part from the IMF. Parities in exchange rates could be modified in case of “fundamental” imbalances. However, member-states must secure IMF authorisation prior to any currency devaluation exceeding 10%. Quote-parts are the main financial resource at the disposal of the IMF. Each member-state is allocated a quote-part according its relative economic weight. Quote-parts are used to determine the highest financial contribution a given member state shall pledge to provide the IMF with; and thus how much votes this country will get and the extent to which it can get financial assistance from the IMF. Quote-parts amounted to 213 billions of SDR (around 310 US$ billions). The US currently detain some 37, 1 billions of Special Drawing Rights. Quote-parts distribution is revised every 5 years.
The end of the regulated international financial system questioned the role of the IMF However, the international monetary system settled down at Bretton Woods and regulated through the IMF came to an end in 1971: the dollar having been targeted by speculation for years, the its convertibility against gold was suspended in August 1971. States regained monetary “freedom” after the Jamaica agreements were signed and enforced (1976 – 1978). More significant currencies fluctuations were allowed thereafter. In spite of G7 cooperation agreements (Plazza Agreements – 1985, Louvre Agreements – 1987), exchange rates stability is no longer achievable through IMF plans or policies.
Though the IMF has been striving to act (and be perceived as such) as a key actor nurturing sound development policies, it has been reproached for its technocratic, Western- and liberal-minded functioning Since 1976, the IMF has consequently been striving at defining itself new missions and has proved keener than in the past to grant countries in difficulties with financial “facilities”. The IMF is a key actor in international economics with regard to development policies: other financial institutions are reluctant to intervene and lend prior to the IMF. These new financial instruments have come under criticisms, however: to get much of them, states must conclude stand-by agreements whereby they pledge to conduct restrictive policies and to implement structural reforms whose social impact can be severe: restrictive policies following the Asiatic crisis or in Argentina since 2002 for instance. Recently, the IMF’s insufficient consideration for developing countries[6] and its technocratic, high-handed decision-making processes where criticised by J. Stiglitz, former Chief Economist of the World Bank. Stiglitz repeatedly called for a more multilateral, open functioning of the IMF, so that IMF policies or interventions would regain more legitimacy. According to him, IMF is ruled by Finance ministers of the richer member states. As a result, the IMF embarked on restrictive finance restoration plans or tough lending conditions which developing countries such as Argentina[7] were forced to adhere, with devastating social consequences at least in the short term. Worth noticing is the fact that Stiglitz did not extend his harsh comments to the World Bank, whom educational programs he praised.
Freeing trade, from GATT to the WTO: Representatives at the BW conference had agreed that rules framing (and actually hampering) international trade should be elaborated within an international organisation in charge of trade. Negotiations were held at the UN Economic & Social Council until 1948. However, since the US Senate refused to ratify the Havana Convention creating an international organisation in charge of international trade, “temporary” agreements on tariffs and trade (GATT) signed in October 1947, set up the frame for increasingly liberalised trade exchanges. Although free trade was encouraged, a few institutional mechanisms were established to prevent unfair trade competition: GATT agreements framed a few free-trade principles[8] (and exceptions) but were not conceived as the mean to enforce them per se. Through this frame, international trade was increasingly freed from legal restrictions that hampered its development: rounds of negotiations since 1947, the Uruguay round[9] foreseeing the creation of the WTO. Trade related disputes must now be settled through WTO jurisdictional mechanism, unilateral reprisals or sanctions became illegal. Bibliography: · AGLIETTA, Michel, Cinquante ans après Bretton Woods, Paris: Economica, 1995, Collection CEPII
· LEFEBVRE, Maxime, Le jeu du droit et de la puissance, Paris: PUF, 2000, Major · STEVENSON, Jonathan, Preventing conflict: the role of the Bretton Woods institutions, London: The International Institute for Strategic Studies; Oxford: OUP, 2000 · http://www.imf.org/external/np/exr/facts/glance.htm
[1] (including Stalin’s USSR) [2] attended by 44 countries at war with Germany and Japan was held in Bretton Woods. [3] Marrakech Agreements (15 April 1994) – functioning since January 1st, 1995) [4] in so far as they had been used in trade disputes (one classical option being to devaluate one’s currency to make imports more expensive and boost cheaper exports abroad), which was deem unfair and dangerous; one devaluation triggering others. [5] Special Drawing Rights [6] The US retains a unique veto power; G7 countries hold 47% of votes and emerging states in Asia (including China) are deemed underrepresented, while African states have only marginal weight on the decision-making process. [7]Since 2001: granted Argentina with loans under severe payback conditions: deregulation and privatisation of social security system [8] Non-discrimination (including Most favoured Nation clause); reciprocity; transparency [9] 1986 – 1993: GATS (General Agreement on Trade and Services), including TRIPS (Trade Related Intellectual property Rights) concluded
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